The dividend ETF category has experienced explosive growth in recent years, as investors have attempted to offset the impact of ultra-low bond yields by seeking income in the global equity markets. While most of the inflows in the United States have been devoted to domestic-oriented ETFs, it may pay to consider another option: international dividend ETFs.

This category features a variety of funds that offer yields above U.S.-focused ETFs.

In mid-July, 2014, for instance, the SPDR S&P International Dividend ETF (DWX) paid a yield of 5.40%, versus 2.25% for its domestic counterpart, the SPDR S&P Dividend ETF (SDY). This sort of gap between similar funds in the two categories is unusual, but international equities typically carry at least a modest yield advantage. For example, the PowerShares International Dividend Achievers Portfolio (PID) offered an SEC yield of 2.85% in mid-2014, above the 2.19% yield of the PowerShares Dividend Achievers Portfolio (PFM).

Further, the international markets have trailed U.S. stocks in the past five years, which provides investors with the opportunity to earn high dividends with more attractive valuations than they could find in the U.S. market. In theory, this should provide greater upside potential in terms of longer-term total returns.

Another advantage of international dividend ETFs is that most funds in the category tend to be geographically diversified. Whereas domestic funds only invest in the United States, developed-market international funds can invest in Europe, Japan, and non-Japan Asia, while emerging market funds can invest in any developing economy – including out-of-the-way locales such as Africa, the Middle East, or Eastern Europe.

Going Global

Income investors also may want to consider a dividend ETF that invests across the geographical spectrum: the Global X SuperDividend ETF (SDIV). The fund has lagged in recent years, which is a function of its exposure to the underperforming emerging markets and more defensive sectors, such as telecommunication stocks, that have trailed the sharply rising broader market. Still, the fund offered an SEC yield of 5.6% in mid-July, 2014, which places it near the top of the dividend ETF category in terms of its pure income potential.

What to Consider Before Investing

The primary drawback of international dividend ETFs is that the overseas markets tend to have a history of higher volatility than the United States. It’s important to keep in mind, however, that in the case of the developed overseas markets, volatility in the trailing three-, five-, and ten-year periods is skewed higher by the impact of the European debt crisis. But this doesn’t necessarily mean that the developed markets will be more volatile in the future. In reality, there’s little reason to expect a stock such as the U.K.-domiciled pharmaceutical giant AstraZeneca (July 2014 yield: 5%) to be any more volatile than a U.S. stock in the same sector, such as Pfizer (3.5%) or Merck (3%), over a long-term period.

On the other hand, also be aware that any emerging market fund – even a dividend ETF – is likely to be much more volatile than a domestic fund for some time to come. But for those that can withstand this volatility, either through a longer time frame or a higher tolerance for risk, it may be perfectly acceptable to take on higher short-term volatility in exchange for stronger long-term return potential.

Another important issue to consider is that while many investors believe dividend stocks to be “safe,” they aren’t safe in an absolute sense. While they may fall less when stocks are weak, they will still decline in value – sometimes quite a bit – when the rest of the market heads south. This issue is covered in detail here.

International equity funds of all stripes also tend to have higher expense ratios than U.S. funds. Over time, this can eat into the yield advantage of international dividend ETFs.

Finally, it’s important to assess funds on the basis of the “30-Day SEC Yield” shown on their websites, rather than the trailing 12-month yields typically shown by third-party providers such as Yahoo! Finance. Learn more about this distinction here.

The Bottom Line

All of the issues in the preceding section are only set forth for consideration, rather than as a reason not to invest. Many international dividend ETFs offer higher yields than their U.S. counterparts, a key consideration for many income investors, and their recent underperformance may indicate higher long-term total return potential. This is particularly true for the emerging markets, which still trade at a discount to developed market stocks simply due to their geography – a gap that should narrow over time.

List of International Dividend ETFs

The list of developed- and emerging market dividend ETFs is shown below. Keep in mind this is only a starting point for further research, since this is a very diverse group of funds:

Developed-Market International Dividend ETFs

iShares Dow Jones EPAC Select Dividend Fund (IDV)
SPDR S&P International Dividend ETF (DWX)
PowerShares International Dividend Achievers Portfolio (PID)
WisdomTree International Dividend ex-Financials Fund (DOO)
WisdomTree DEFA High-Yielding Equity Fund (DTH)
WisdomTree International LargeCap Dividend Fund (DOL)
MSCI International Quality Dividend ETF (QDXU)
FlexShares International Quality Dividend Defensive Index Fund (IQDE)
WisdomTree International SmallCap Dividend Fund (DLS)
WisdomTree International Hedged Dividend Growth Fund (IHDG)
WisdomTree Europe Dividend Growth Fund (EUDG)
iShares Asia / Pacific Dividend 30 Index Fund (DVYA)
WisdomTree Australia Dividend Index (AUSE)

Emerging Market Dividend ETFs

SPDR S&P Emerging Markets Dividend ETF (EDIV)
WisdomTree Emerging Markets High-Yielding Equity Fund (DEM)
iShares Emerging Markets Dividend ETF (DVYE)
Market Vectors MSCI Emerging Markets Quality Dividend ETF (QDEM)
EGShares EM Dividend High Income ETF (EMHD)
WisdomTree Emerging Markets Dividend Growth Fund (DGRE)
EGShares Emerging Markets Dividend Growth ETF (EMDG)
ALPS Emerging Sector Dividend Dogs ETF (EDOG)
EGShares Low Volatility Emerging Markets Dividend ETF (HILO)
WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)
WisdomTree Middle East Dividend Fund (GULF)
WisdomTree China Dividend ex-Financials Fund (CHXF)

Disclaimer: The information on this site is provided for discussion purposes only, and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. Always consult an investment advisor and tax professional before you invest.